Consolidation
Consolidation is a popular repayment option that combines multiple student loans into 1 and typically extends payment beyond the standard 10-year term. For the borrower with multiple loans and an above-average debt load, consolidation could mean a lower, single monthly payment with a lower fixed interest rate. However, consolidation can also increase your total amount of interest paid, as you pay back your loan over a much longer period of time. Fully research the pros and cons, talk to your student loan lender for more information, or contact ASA at 1.866.493.5563 or information@amsa.com
What is student loan consolidation?
When you consolidate your federal student loans, the consolidating lender—the company that is consolidating the loans for you—pays off your individual loans and issues you 1, new loan for the total amount. Almost all federal education loans are eligible for consolidation, but private or alternative loans are not. If you chose to extend your repayment term, you will generally have between 12 and 30 years to repay a consolidation loan, rather than the standard 10-year term for unconsolidated federal loans.
Interest rates
The interest rate on a consolidation loan is fixed and is determined by taking the weighted average of the interest rates on your existing loans and rounding up to the nearest one-eighth of a percent. This means that the interest rate on a $10,000 loan “counts” more towards the interest rate on the consolidation loan than the interest rate on a $5,000 loan would. Federal Stafford Loans borrowed prior to July 1, 2006 carry variable interest rates that change each July 1. Currently, the interest rate on student loans borrowed between July 1, 1998 and July 1, 2006, for borrowers enrolled in school at least half-time or in their grace period, is 6.54%, and the rate for borrowers who are in repayment is 7.14%. Federal Stafford Loans borrowed after July 1, 2006 will have a fixed rate of 6.8%, while PLUS Loans will be fixed at 8.5%.
If you have questions about consolidation, please contact a Student Loan Specialist at 1.866.493.5563 or information@amsa.com.
Pros
Consolidating your federal student loans while interest rates are low can be a good idea, especially if you have a large amount of variable-rate student loan debt, as consolidating may help you save money over the life of your loans. By consolidating, you lock in an interest rate that is the weighted average of the interest rates on the loans you are consolidating, and you protect yourself against the possibility that rates will rise in the future. Fixed-rate student loans will not be affected by interest rate fluctuations. Consolidating may reduce your monthly payment amount because the repayment term for consolidation loans is typically longer than the repayment term for unconsolidated loans, depending on how much student loan debt you carry. Consolidation also provides the convenience of having to pay only one monthly bill for all of your consolidated loans, rather than having to keep track of several monthly bills.
Cons
Although there are benefits, consolidating may have a downside. If interest rates decrease in the future, the rate on your consolidated loans will not drop whereas the rate on your unconsolidated variable-rate student loans would have gone down. If interest rates remain below your rate for a long period of time, you may end up paying more over the life of your loan than if you had waited and consolidated later or not consolidated your variable-rate student loans at all. Also, although the interest rate on a consolidation loan is fixed, the total amount of interest you pay is not. By reducing your monthly payments and extending the period of time you take to repay your loans, you increase the amount of time during which you will be charged interest and the size of your outstanding balance on which your interest charges are based. This means the total amount of interest you pay over the life of your loan will increase with a consolidation loan versus the standard repayment term and monthly payment. However, you can overcome this by repaying your consolidated loan more quickly by making larger monthly payments, if you can afford to do so. If you are planning to apply for any loan forgiveness programs, it is important to know that consolidation loans are not eligible for all loan forgiveness programs.
